Why Is A Roth IRA A Good Choice When Investing?

When starting to invest one of the first things that you'll have to decide is how you want to invest. Will you choose a tax advantaged retirement vehicle like the 401k or Traditional IRA? Will you use a Roth IRA that is funded with post-tax dollars? Will you go down the road of taxable investing through a brokerage account? Will you use something new like peer-to-peer lending?

All of these are things you are important to consider when setting up your retirement accounts, as it can affect many different aspects of your financial picture.

For me I don't consider myself a super-savvy investor, but I do feel like I've got a pretty good hold on what I want to do for our savings and retirement accounts. I want to invest in mostly passive index funds, and invest in the following account types – in this order:

Invest in Roth IRA to max: First, I want to invest in our Roth IRA to the max of $5000 per investor – $5000 each for my wife and I.

Invest in company 401k to max: Next we'll be investing in my company 401k up until the max. I'm not sure we'll be meeting that maximum this year because of other expenses that have come up.

Why We're Investing With A Roth IRA First

There are a few reasons why we're investing with a Roth IRA first.

Tax advantages: We really like the idea of investing our money in a Roth IRA, letting it sit there, and never having to pay a dime more in taxes on the contributions or earnings as long as we wait until retirement to withdraw it.

Tax diversification: The Roth IRA is a part of our tax diversification plan, where we invest in both pre-tax and post tax investments so as to hedge our bets when it comes to current and future tax rates and which will be higher or more to our advantage. We're investing a portion in Roth, and a portion in our 401k which will be taxable at withdrawal.

The Roth allows for flexibility: One thing we like about the Roth IRA is the fact that you can take out your contributions at any time without having to pay it back like the 401k. While it isn't a good idea to be withdrawing your retirement funds, it can be good to know that in a pinch you can withdraw those contributions. (Note: You can't withdraw earnings without penalty, only contributions).

Easy to start, and tons of options: Opening a Roth IRA is super easy and can be done within a half hour to an hour if you want. Plus companies like Vanguard are making it easier to start, reducing their minimum investments in a wide range of funds to only $1000 to start. Most people should be able to scrape together $1000 to start their Roth IRA! In addition, the companies are making a wide range of investments available to account holders, with many more choices than a traditional 401k.

Roth can be passed down to heirs tax free: While it wasn't one of our main reasons for choosing the account, the fact that your heirs can withdraw the money tax free from the account upon your death is a plus. The withdrawals are tax free, just like for you.

So those are some of the pluses of the Roth IRA, and why we're choosing to invest in those accounts first. Of course, we're hoping to also invest in our company 401k after our max Roth contribution has been reached, as well as possibly some other taxable investments later on if we have a good year and can max out both the Roth and 401k (unlikely).

Roth IRA Rules

If you're looking to invest in a Roth IRA as well, here are some posts you might find helpful.

Last Edited: 15th June 2011 The content of biblemoneymatters.com is for general information purposes only and does not constitute professional advice. Visitors to biblemoneymatters.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.

Comments

What I wasn’t clear about – and this is a great feature – is that contributions are always tax and penalty free. Originally, I thought you had to wait five years, but that applies to the earnings portion.

I agree that you shouldn’t be withdrawing your retirement funds, but this can be considered a type of last-ditch emergency fund.

Another advantage to the Roth is that there are not any required minimum distributions during the life of the owner, as there are in a traditional IRA.

Beginning in 2010, there are no income limitations to Roth CONVERSIONS, so you can convert a portion of your traditional IRA each year into a Roth. I would recommend anything you still have left in the 10% and 15% brackets.

Some 401k plans have a Roth option for the employee contributions (the match from the employer is still traditional pre-tax dollars). Another great way to take advantage of the Roth benefits, if available.

The Roth 401(k) is also great because of the higher contribution limits compared to Roth IRA. The issue with the 401(k) is that you might get stuck with higher costing funds and limited choices as compared to the IRA.

The information contained in BibleMoneyMatters.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation.

In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.

Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.